[A-List] Technical question (Regulation Q interest rate)

[Henry C.K. Liu]

In 1966, for the first time, commercial banks experienced
a period when the Federal Reserve actively
used Regulation Q ceiling rates on time deposits as
a means to restrict the banks’ ability to extend credit.
Since that time commercial banks have actively
sought new methods, such as Eurodollar borrowings,
to obviate the constraint of Q ceilings.

http://research.stlouisfed.org/publications/review/69/09/Historical_Sep1969.pdf

xxxx wrote:

>yes there was. it was called "a credit crunch of 1966"---the first
>instability of the postwar era, which included a run off on municipal bond
>market..
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>a mild one though....
>
>----- Original Message ----- 
>From: "Henry C.K. Liu" <hliu at mindspring.com>
>To: "The A-List" <a-list at lists.econ.utah.edu>
>Sent: Wednesday, March 31, 2004 6:49 PM
>Subject: Re: [A-List] Technical question (Regulation Q interest rate)
>
>
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>>Do you mean the 1987 crisis? I am not aware there was a 1966 crisis.
>>
>>The Fed's legislative victory was delivered on the back of a larger
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>issue -
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>>the deregulation of finance. In companion legislation, Congress repealed
>>virtually all of the remaining government limits on interest rates and
>>regulation on lending that had existed since the New Deal, much as the
>>enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999 in effect
>>repealed the Glass-Steagall Act, the long-standing prohibitions on the
>>mixing of banking with securities or insurance businesses, and thus
>>permitting "broad banking". The price of money was free at last to seek
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>its
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>>"natural" equilibrium in the market place.
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>>The prime rate rose above 15 percent in early 1980 when the deregulation
>>legislation reached its final stage. The Democratic Congress voted
>>overwhelmingly for a package that condemned borrowers to high cost and
>>favored lenders with high returns, by arguing that the benefit of high
>>interest on pension accounts justified the high cost of mortgage payments.
>>In other words, as Pogo the cartoon character said: "The enemies, they are
>>us." The populist Regulation Q, which regulated for several decades limits
>>and ceilings on bank and savings-and-loan (S&L) interest, was phased out.
>>Banks were allowed to pay interest on checking account - the NOW accounts,
>>to lure depositors back from the money markets. S&Ls' traditional
>>interest-rate advantage was removed, to provide a "level playing field",
>>forcing them to take the same risk as commercial banks to survive.
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>Congress
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>>also lifted restrictions on S&Ls' commercial lending, instead of the
>>traditional home mortgages, which promptly got the whole industry into
>>trouble that would soon required an unprecedented government bailout of
>>depositors with tax money. But the developers who made billions were
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>allowed
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>>to keep their profits. State usury laws were unilaterally suspended by an
>>act of Congress in a flagrant intrusion on state rights.
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>>The political coalition of converging powerful interests was evident.
>>Virulent high inflation had damaged the holders of financial wealth,
>>including small savers, created by a period of benign low inflation
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>earlier,
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>>so that even progressives felt something has to be done to protect the
>>middle class. The solution was to export inflation to low-labor-cost areas
>>around the world, taming domestic inflation with the export of jobs and
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>the
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>>domestic inflation devil - US wages. Neo-liberalism was born with the twin
>>midwives of sound money and free financial markets, disguising economic
>>neo-imperialism as market fundamentalism.
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>>
>>BANKING BUNKUM
>>Part 3b: More on the US experience
>>By Henry C K Liu
>>Asia Times, November 27 2002
>>
>>http://www.atimes.com/atimes/Global_Economy/DK27Dj01.html
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>>xxxx wrote:
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>>>Martin Wolfson argues that the 1966 crisis happened because of the Fed's
>>>"refusal to raise Regulation Q interest rate ceiling on large negotiable
>>>certificates of deposits" Is this refusal a sign of "tight" or "easy"
>>>monetary policy?
>>>
>>>Regulation Q is a limit on time deposits to prevent the growth of money
>>>supply. So if the Fed did not increase the Q ceiling, it means that
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>monetary
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>>>policy was not tight. Correct or wrong?
>>>
>>>but why do keynesians say that the crisis happened becase of tight
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>monetary
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>>>policy. do they mean "high interest rates" or "low regulation q ceiling"?
>>>
>>>Any direct response on this is greatly appreciated
>>>
>>>3 monetary tools durin a crisis:
>>>
>>>1) regulation q ceiling
>>>2) reserve requirements
>>>3) discount rate
>>>
>>>
>>>
>>>******************************************************
>>>xxxx A. xxxx
>>>Doctoral Candidate
>>>Department of Political Science
>>>Nelson A. Rockefeller College of Public Affairs and Policy
>>>University at Albany, S.U.N.Y.
>>>135 Western Avenue, Milne Hall
>>>Albany, NY 12222
>>>xxxx at verizon.net
>>>******************************************************
>>>"They always say that time changes things, but you actually
>>>have to change them yourself." -- Andy Warhol
>>>******************************************************
>>>
>>>
>>>
>>>
>>>
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